Keywords
propping, corporate debt, weak legal systems
Abstract
In countries with weak legal systems, there is a great deal of tunneling by the entrepreneurs who control publicly traded firms. However, under some conditions entrepreneurs prop up their firms, i.e., they use their private funds to benefit minority shareholders. We provide evidence and a model that explains propping. In particular, we suggest that issuing debt can credibly commit an entrepreneur to propping, even though creditors can never take possession of any underlying collateral. This helps to explain why emerging markets with weak institutions sometimes grow rapidly and why they are also subject to frequent economic and financial crises. Journal of Comparative Economics 31 (4) (2003) 732–750. School of Operations Research and Industrial Engineering, Cornell University, Ithaca, NY 14853, USA; Sloan School of Management, MIT, Cambridge, MA 02142, USA; Marriott School, Brigham Young University, Provo, UT 84602, USA.
Original Publication Citation
Propping and tunneling (with E. Friedman and S. Johnson), 2003, Journal of Comparative Economics 31, 732–750.
BYU ScholarsArchive Citation
Friedman, Eric; Johnson, Simon; and Mitton, Todd, "Propping and Tunneling" (2003). Faculty Publications. 9269.
https://scholarsarchive.byu.edu/facpub/9269
Document Type
Peer-Reviewed Article
Publication Date
2003
Publisher
Journal of Comparative Economics
Language
English
College
Marriott School of Business
Department
Finance
Copyright Status
© 2003 Association for Comparative Economic Studies. Published by Elsevier Inc. All rights reserved.
Copyright Use Information
https://lib.byu.edu/about/copyright/